83721 September 2013 - Number 106 HARNESSING THE POTENTIAL FOR GREEN GROWTH IN KUWAIT Dr. Mohammed Al-Ahmad, Dr. Marwan Dimashki, economics to analyze the impacts of Samia Al-Duaij and Tom Roundell1 environmental degradation and climate change, the report hopes to highlight the positive incentives for good environmental practices, Introduction: Like many countries in the and in particular illustrate how difficult Middle East and North Africa (MENA) region, challenges present opportunities to diversify Kuwait faces considerable environmental the economy through green growth, and challenges due to air pollution, increasingly generate sustainable jobs and income for future scarce water resources and deteriorating arable generations. land. As the problems associated with climate change intensify, governments and countries Fig. 1: Costs of Environmental Degradation in Selected need to respond with more creative and wide Countries (% of GDP) ranging policy responses in order to safeguard the standards of living for future generations. While the challenges faced by countries like Kuwait are formidable, they also present an exciting opportunity for diversifying an oil- based economy through green growth initiatives. The Cost of Environmental Degradation Report: Part of the motivation behind the World Bank’s Cost of Environmental Degradation report prepared in partnership between the World Bank and the Environment Public Authority in Kuwait (EPA) is to Oil Dependence and Kuwait : Oil dependence highlight the path to efficient resource is a major challenge for Kuwait. Currently oil allocation by properly costing the externalities revenues are the primary source of foreign that affect the economy. By using the tools of exchange revenue and wealth creation, accounting for around 95% of total export 1 Drs. Al-Ahmad and Dimashki are with the Environment earnings.2 The Middle East has some of the Public Authority (EPA) in Kuwait. Samia Al-Duaij and Tom highest fuel subsidies in the world, and fossil Roundell were with the World Bank team working with the EPA (Kuwait). This Quick Note was cleared by the fuel consumption subsidies are valued at management of the EPA in Kuwait, Bassam Ramadan, $2,786.6 per person per year in Kuwait, Country Manager, Kuwait, the World Bank (MNCKW), and Charles Cormier, Sector Manager, Energy and 2 Environment, the World Bank (MNSEE). ‘Kuwait, Country Analysis Brief’, IEA, July 2011 currently the highest rate worldwide3. This Benefits of Costing Environmental presents a serious obstacle in terms of economic Degradation: The purpose of the Cost of diversification and green growth. Fatih Birol, Environmental Degradation report is to raise chief economist at the International Energy awareness of the degree and consequences of Agency (IEA) comments that, “Worldwide, we environmental degradation. By placing a have $500 Billion in fossil fuel subsidies and 50 monetary value on the losses incurred through per cent of that is in the Middle East…It is the misallocation of resources, for example extremely challenging to have such big through the loss of working hours or the subsidies and achieve renewable energy amount of growth foregone, such studies aim to targets…If you want renewable industry to foster a more holistic approach to government grow and on the other hand, you have fossil planning which incorporates long term fuel subsidies, they are not complementary”.4 sustainable development and climate management into investment planning. This artificially low price of oil distorts Through better information on the nature and economic choices made by policy makers and impact of environmental degradation, the businesses on the utilization of natural report hopes to raise awareness among resources, leading to a mismatch between the stakeholders about climate change and its economy’s endowment base and its use. The consequences. abundance of Kuwait’s oil endowment has led to an economy heavily dependent on one The Process of Preparing the Report : The resource and a tendency to underestimate other report was prepared through a consultative development channels. This stems in part from process with a series of meetings and failing to take into account the economic costs workshops held together with the EPA of environmental degradation and properly (Environment Public Authority) in Kuwait and value Kuwait’s other sources of natural capital. relevant authorities. These helped refine the The result of this misallocation of resources has conclusions of the report and disseminate its been pollution-related health problems, findings among the wider academic and policy declining per capita water resources, loss of community. The team also held constructive arable land, deteriorating coastal zones and meetings with the SCPD (Supreme Council for vulnerable marine resources. Planning and Development) with the aim of incorporating the findings of the report into the Fig. 2: Share of Costs of Degradation by planning process at an earlier stage to Sector maximize the impact of policy recommendations. To this end, the SCPD expressed an interest in World Bank assistance to set up a Natural Wealth Accounting in Kuwait in order to capture the environmental costs in the budget planning process in their next 5 Year Development Plan. Green Growth and Kuwait: It is important to emphasize that better management of natural capital is not simply a matter of imposing restrictions on existing industries, but also 3 International Energy Agency, World Energy Outlook 2011, Energy Subsidies, generating economic opportunities for green http://www.iea.org/weo/subsidies.asp growth. The report lays out the economic 4 http://www.worldenergyoutlook.org/pressmedia/quotes/2/index.html September 2013 · Number 106· 2 argument for several forms of green growth. In economic thinking. In this respect, the report’s Kuwait’s case, one example would be to change focus is really about correcting market and the current technological cycle and standards of governance failures that undermine economic water desalination to reduce energy intensity, systems. An example of this is the $1 trillion to curb air pollution and impact positively on the $1.2 trillion currently being spent worldwide on marine ecosystem. A good chance for environmentally harmful subsidies for fossil investment in green economy in Kuwait also fuel, agriculture, water, and fisheries. Green exists in introducing improvements in the solid growth is affordable because many green waste segregation, collection and disposal policies pay for themselves directly, and the practices and better recycling mechanisms for others make economic sense once externalities the recovery of valuable materials. Another are priced and eco-system services are correctly example is the sustainable management of valued. regional fisheries. Allowing fish stocks to recover in Kuwait would revive the flagging Table 1: Channel through which green fishing industry, generate tourism revenues policies can contribute to growth and help Kuwait rediscover its fishing heritage. There is also the restoration and enhancement of Kuwait’s underground watershed services. Currently, Kuwait’s heavily subsidized water supply has led to extensive use of water for agriculture and the growth of water intensive manufacturing. This depletes Kuwait’s aquifers, its one truly sustainable water resource. The proper pricing of the long term economic costs of aquifer depletion would make the artificial recharging of groundwater resources an economically sound proposition. Such a policy would mitigate the long term costs of groundwater depletion, but would also help generate jobs, ranging from monitoring and evaluation of groundwater resources to designing and implementing the recharging of aquifers. Better Management of Natural Resources in Kuwait: A variety of market, policy, and (Source: Inclusive Green Growth, World Bank institutional failures mean that many countries Report, 2012) fail to use their natural capital in ways that are economically efficient, and neglect the true The Cost of Environmental Degradation report represents the first step in this process. social costs of production and resource Improved indicators that go beyond measuring depletion. Overcoming these requires a short-term economic growth are vital if combination of different measures to enhance countries like Kuwait are going to achieve the management of human and natural capital. growth that is sustainable in the long run. Policymakers will need to align policies, These indicators themselves rely on better data economic incentives and governance in order to collection and environmental monitoring on a overcome entrenched attitudes and short-term national and regional level on which to base the September 2013 · Number 106· 3 economic analysis of environmental impacts. Improved data collection is one of the most Contact MNA K&L: important factors that can improve effective Gerard A. Byam, Director, Strategy and allocation of resources. Kuwait’s EPA has Operations. MENA Region, The World Bank Preeti S. Ahuja, Manager, MNADE established the Environmental Monitoring Information System of Kuwait, eMISK, which Regional Quick Notes Team: gathers authenticated environmental data and Omer Karasapan and Roby Fields information about Kuwait5. This enables policy Tel #: (202) 473 8177 makers to decide among competing The MNA Quick Notes are intended to summarize investments and policies, and allocate scarce lessons learned from MNA and other Bank Knowledge and Learning activities. The Notes do not financial and human resources in a manner that necessarily reflect the views of the World Bank, its maximizes social welfare in the long term. The board or its member countries. ultimate goal is for countries like Kuwait to begin to incorporate cost of natural capital into decision-making, which will constitute a major step towards realizing the promise of green growth and shifting the economy of Kuwait onto a more sustainable path. 5 For more see: (www.emisk.org) September 2013 · Number 106· 4